Auto stocks saw a general sell off when news spread of a bad monsoon, the assumption being that it would affect corporate revenues and profits. However, a long-term player may glean value from this sector. Several stocks appear to have undergone corrections inside a positive long-term trend, rather than having reversed direction from bullish to bearish. They could continue to gain in the long term. Heavy and medium commercial vehicle stocks like Leyland and Telco seem to be favoured above the two-wheeler segment. Here's a technical perspective on the important players.
Ashok Leyland
The Leyland stock bounced from its 200-DMA of around Rs 90 in late July. The stock had been bullish since the fourth quarter of 2000 (calendar year), moving from a base of around Rs 35-40 to highs of Rs 122 in early July. Every reaction has usually found support on a 30 degree trendline, if you project from weekly prices.
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The latest reaction found reinforced support -- the 30 degree trendline was backed by the 200-DMA. The stock is trading around Rs 100 levels, and faces strong resistance at around Rs 105. In the long run, it should recover. The support at Rs 90 should hold during minor bouts of hammering. Probably a stop-loss should be set around Rs 85, since a move below that would have decisively breached both the 200- DMA and trendline, indicating a reversal of the long-term trend.
Bajaj Auto
The Bajaj stock ended a dream run when family squabbles made it to the front pages of the financial papers. It has seen a reaction from Rs 565 in mid-July to around Rs 410 in early August. Since then, it has consolidated and recovered some ground to trade around Rs 425-430. There is huge resistance around Rs 450 and again, heavy resistance around Rs 470. The worrying factor is that the resistance is shaped along the 200-DMA suggesting that the long-term trend has reversed from bullish to bearish. It would be advisable to stay out unless the stock rises above Rs 450.
Hero Honda
The stock saw a sustained bull run from Rs 130 in May 2001 to around Rs 400 in March 2002. It was hammered down to lows of Rs 250, which is a 50 per cent retracement from its earlier move upwards.
At this point, Hero Honda has started receiving investment support. Volumes are rising as well. The stock has recovered to around Rs 300.
If it crosses the strong resistance at Rs 305-310, it could move swiftly past Rs 350. The key 200-Day Moving average is hovering in the same Rs 310 zone. So this resistance is absolutely crucial. A recovery above the 200-DMA would mean that the long-term trend of the stock remains bullish. Currently support is available around Rs 275 levels. The short-term trend of the stock seems to be bullish, so there should be more hope for the bulls than the bears.
Telco
The stock has been affected by the scam in group company Tata Finance and fears that sales could decline because of a bad monsoon. It has retraced from Rs 165 in early July to consolidate at the Rs 120-125. It has moved sideways with a slightly positive bias through most of August. There is a key resistance level at around Rs 140. We expect a continuation of the sideways movement between Rs 120 and Rs 140 in the near term. Any break above Rs 140 will be extremely positive and will probably take the stock back to around Rs 160 levels, if it is accompanied by daily volumes of Rs 25-30 lakh or more. The long-term pattern suggests that the stock remains bullish, since it has found support just above the 200-DMA.
TVS Motor
The stock had an incredible run from Rs 90 levels in November 2001 to a spectacular Rs 550 by mid-July. Since then, it has fallen to lows of Rs 410 and consolidated to recover to around Rs 437. The past few sessions have seen huge volumes, even though prices haven't moved that much. The stock is still way above its 200-DMA. It should continue to show gains in the long term. There appears to be strong resistance between Rs 450 and Rs 470, and the stock is likely to test that several times before showing any significant gains.